We have employed C2C12 myotubes to investigate lipid inhibition of insulin-stimulated signal transduction and glucose metabolism. Cells were preincubated for 18 h in the absence or presence of free fatty acids (FFAs) and stimulated with insulin, and the effects on glycogen synthesis and signaling intermediates were determined. While the unsaturated FFAs oleate and linoleate inhibited both basal and insulin-stimulated glycogen synthesis, the saturated FFA palmitate reduced only insulin-stimulated glycogen synthesis, and was found to inhibit insulin-stimulated phosphorylation of glycogen synthase kinase-3 and protein kinase B (PKB). However, no effect of palmitate was observed on tyrosine phosphorylation, p85 association, or phosphatidylinositol 3-kinase activity in IRS-1 immunoprecipitates. In contrast, palmitate promoted phosphorylation of mitogen-activated protein MAP) kinases. Ceramide, a derivative of palmitate, has recently been associated with similar inhibition of PKB, and here, ceramide levels were found to be elevated 2-fold in palmitate-treated C2C12 cells. Incubation of C2C12 cells with ceramide closely reproduced the effects of palmitate, leading to inhibition of glycogen synthesis and PKB and to stimulation of MAP kinase. We conclude that palmitate-induced insulin resistance occurs by a mechanism distinct from that of unsaturated FFAs, and involves elevation of ceramide by de novo synthesis, leading to PKB inhibition without affecting IRS-1 function.